Financial Times
February 19, 2012
Deficit reduction or growth? Everyone wants both, but which should come first?
This is the question at the heart of the increasingly polarised debate on UK economic policy ahead of the Budget. But it’s the wrong question. We should first ask: what can be done to boost the economy without borrowing more money? The answer shows that strengthening deficit-cutting credibility and stimulating growth can go hand in hand.
In November the Office for Budget Responsibility substantially downgraded its growth forecast. It also highlighted the need for a further £15bn of annual spending cuts or tax rises by 2016. So the government’s fiscal strategy is vulnerable on two fronts. Weak growth is putting pressure on plans to cut the deficit, yet there is no adequate strategy to boost it. And the government’s deficit-reduction credibility has taken a knock since it decided to wait until shortly before a general election to tell us how it plans to distribute the extra £15bn of fiscal pain.
The perils on both sides of the debate are severe. Borrowing more to boost growth risks a catastrophic loss of confidence among investors. But continued austerity risks a slump and permanent damage to the supply side of the economy through high and persistent unemployment and idle physical capital. As the growth outlook has deteriorated and borrowing has increased, each side in the “growth or cuts” debate has become more entrenched, implausibly claiming that the latest gloom can only be interpreted in support of their solution.
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